S.J. bank gets warning letter

STOCKTON - State and federal regulators have hit Community Bank of San Joaquin, based in Stockton, with a cease-and-desist order that charges bank management with unsafe or unsound banking practices.

Bruce Spence

STOCKTON - State and federal regulators have hit Community Bank of San Joaquin, based in Stockton, with a cease-and-desist order that charges bank management with unsafe or unsound banking practices.

The bank was operating with insufficient capital, had too large a volume of "poor quality" loans and engaged in unsatisfactory lending and collecting practices, according to an order issued jointly by the Federal Deposit Insurance Corp. and the California Department of Financial Institutions.

The order also said that bank managers' policies and practices were detrimental to the bank and that the board of directors failed to adequately supervise bank management.

The order came after a regularly scheduled examination of the bank's operations in May.

Bank CEO Jane Butterfield flinched at the "cease and desist" order designation, saying that bank officials agreed to changes and actions cited by the order, she said.

The core of the order focused on concerns that the bank wasn't being aggressive enough in identifying problem loans and either negotiating paybacks or repossessing assets, she said.

Changes have already been put into place to address that, she said. That includes her spending three-fourths of her time these days focusing on problem loans and restructuring, as opposed to spending all her time previously working to boost business.

The bank had assets of $146.8 million at the end of the quarter ended Sept. 30 and had about $8.9 million in problems loans, Butterfield said.

The bank did no subprime mortgage lending, she said, and all of the "nonperforming" loans were to local home builders taking out loans before 2007 to buy land and build single-family homes.

The bank has written off as lost about $2.5 million of the nonperforming loans, she said, while the bank has repossessed about $4 million worth of property.

No one guessed the real estate and financial sectors would see such a harsh downturn, she said, and San Joaquin County is "ground zero" as the worst market in the country in the real estate-related meltdown.

"Hindsight is 20/20," Butterfield said. "I don't feel we were operating in an unsafe and unsound manner. ... At the time we made the loans, they were good loans."

The bank, founded in November 1999 as a wholly owned subsidiary of Bank On It Inc., has two branches, both in Stockton. In its most recent report for the quarter that ended Sept. 30, the bank reported a loss of $917,118.

Butterfield also denied that the bank was undercapitalized, saying that the bank's capital ratio stood at 16.3 percent, well above the 10 percent mark that regulators say denotes a "well-capitalized" bank.

"We're a very healthy bank," she said. "We have problem loans, but we have enough capital to absorb them. I'm quite confident about that."

The order also calls for the hiring of a banking specialist to conduct an independent review of bank management and the board of directors.

Both Butterfield and Robert Wheeler, a member of the board of directors since the bank's founding, said the language concerning management and the board of directors was standard language in such orders.

Wheeler predicted the bank will return to profitability in the first quarter of next year.

Management and the board have done as well as possible, he said, although ultimately all have to be accountable for whether they could have better seen the real estate downturn coming.

"We just didn't predict - along with an awful lot of people - what would happen to property values in San Joaquin County," Wheeler said. "We took our hits and will work with the regulators."

Wheeler, retired as plant manager of the General Mills in Lodi, said the board already has hired a banking specialist to conduct the independent survey. The study will be finished by the end of January, he said, and the board will start laying out any changes in February.

Still, the bank was profitable for 24 consecutive quarters until the real estate downturn suddenly hit, he said.

"So we had done something right for a number of quarters while growing our bank," he said.

Butterfield said the bank was started with $11.5 million in capital and has grown to $140 million. Earnings over those 24 consecutive quarters totaled $5.8 million.

Asked whether the order was an indictment of bank management and the board of directors, Butterfield said that in these difficult economic times, the regulators will and should scrutinize bank leadership more closely.

"They want to make sure that we have the skills required to weather this economic storm," she said. "Given the severity of this current downturn, I would expect they are asking the same question of every bank in the country."